Capital Gains (fourth head, S.45-55A) arise on the transfer of a capital asset. The gain is the excess of consideration received over the cost of acquisition and improvement. Capital gains are classified as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) based on the holding period of the asset.
Legal Framework
| Provision | Content |
|---|---|
| S.2(14) | Definition of "capital asset" (property of any kind, with exclusions) |
| S.2(42A) | Definition of "short-term capital asset" (held for ≤ specified period) |
| S.2(29A) | Definition of "long-term capital asset" |
| S.45(1) | Charging section: gains from transfer of capital asset |
| S.47 | Transactions not regarded as transfer (exempted transfers) |
| S.48 | Mode of computation of capital gains |
| S.49 | Cost with reference to certain modes of acquisition |
| S.50C | Stamp duty value as deemed consideration (immovable property) |
| S.54-54GB | Exemptions from capital gains |
| S.111A | STCG on listed equity (special rate) |
| S.112 | LTCG general rate |
| S.112A | LTCG on listed equity exceeding Rs.1.25 lakh |
Capital Asset: What It Includes and Excludes
| Includes (S.2(14)) | Excludes |
|---|---|
| Property of any kind (movable/immovable) | Stock-in-trade, consumable stores, raw materials |
| Securities (shares, debentures, mutual funds) | Personal effects (movables for personal use), EXCEPT jewellery, art, archaeological collections |
| Jewellery, drawings, paintings | Agricultural land in rural India (not within municipality limits) |
| Rights in/related to Indian company | Gold deposit bonds under Gold Deposit Scheme 1999 |
| Any interest in entity (partnership) | Specified gold bonds issued under Gold Monetisation Scheme |
Holding Period Classification
| Asset type | Short-term if held ≤ | Long-term if held > |
|---|---|---|
| Listed equity shares / equity mutual funds | 12 months | 12 months |
| Unlisted shares | 24 months | 24 months |
| Immovable property (land/building) | 24 months | 24 months |
| All other assets | 36 months | 36 months |
Computation (S.48)
| Step | STCG | LTCG |
|---|---|---|
| Full value of consideration | Sale price / deemed consideration | Sale price / deemed consideration |
| Less: Transfer expenses | Brokerage, commission, legal fees | Same |
| Less: Cost of acquisition | Actual cost (or deemed cost u/s 49) | Indexed cost (CII adjustment) |
| Less: Cost of improvement | Actual cost | Indexed cost |
| Capital Gain | STCG = Net amount | LTCG = Net amount |
Note: Post Finance Act 2024 (from 23 July 2024): Indexation benefit removed for all assets except those acquired before 23 July 2024 with option to choose between indexed @20% or unindexed @12.5%.
Tax Rates
| Type | Rate | Section |
|---|---|---|
| STCG on listed equity (STT paid) | 20% | S.111A |
| STCG on other assets | Normal slab rates | S.45 read with S.4 |
| LTCG on listed equity (STT paid) | 12.5% (above Rs.1.25 lakh exemption) | S.112A |
| LTCG on other assets | 12.5% (no indexation, post 23 July 2024) | S.112 |
Key Exemptions
| Section | Asset transferred | New asset acquired | Time limit |
|---|---|---|---|
| S.54 | Residential house (long-term) | One residential house | 1 year before / 2 years purchase / 3 years construction |
| S.54B | Agricultural land | Agricultural land | 2 years |
| S.54EC | Any long-term capital asset | Specified bonds (NHAI/REC) | 6 months, max Rs.50 lakh |
| S.54F | Any long-term asset (other than residential house) | One residential house | 1 year before / 2 years / 3 years |
How Much Is Exempt (Exam Formula)
S.54 (house sold → house bought):
- If cost of new house ≥ capital gain → ENTIRE gain exempt
- If cost of new house < capital gain → Exempt = cost of new house; Balance = taxable LTCG
S.54EC (any asset sold → bonds bought):
- Exempt = Amount invested in bonds (max Rs.50 lakh)
- Balance LTCG = Total gain minus amount invested
S.54F (non-house asset sold → house bought):
- If full net consideration invested in new house → ENTIRE gain exempt
- If partial → Exempt = Gain × (Amount invested / Net consideration)
- Key difference from S.54: S.54F looks at net consideration, not just gain
Worked Example: S.54 Exemption Computation
Facts: Mr. Iyer sells his old house for Rs.80 lakh (LTCG = Rs.30 lakh after cost deduction). He purchases a new residential house for Rs.25 lakh within 1 year.
Under S.54:
- Capital gain = Rs.30 lakh
- Cost of new house = Rs.25 lakh
- Since cost of new house (25L) < capital gain (30L):
- Exempt = Cost of new house = Rs.25 lakh
- Taxable LTCG = 30L minus 25L = Rs.5 lakh
If instead Mr. Iyer bought a house for Rs.35 lakh:
- Cost of new house (35L) ≥ capital gain (30L)
- Entire Rs.30 lakh exempt. No taxable capital gain.
Worked Example: S.54F Exemption (Different Formula)
Facts: Mr. Reddy sells shares (not a house) for Rs.1 crore (net consideration). LTCG = Rs.40 lakh. He buys a house for Rs.60 lakh.
Under S.54F:
- Net consideration = Rs.1,00,00,000
- Amount invested in house = Rs.60,00,000
- Exempt = Gain × (Amount invested / Net consideration) = 40L × (60L / 100L) = Rs.24 lakh
- Taxable LTCG = 40L minus 24L = Rs.16 lakh
If Mr. Reddy invested the full Rs.1 crore in the house: Entire Rs.40 lakh exempt.
Key exam distinction: S.54 compares cost of new house with GAIN. S.54F compares investment with NET CONSIDERATION (sale price). S.54F is proportionate; S.54 is "up to the gain amount."
Recall Check
- What is the holding period for an immovable property to qualify as long-term capital asset?
- What is the charging section for capital gains?
- What does S.47 provide regarding certain transfers?
Key Cases
CIT v. BC Srinivasa Setty (1981) CIT v BC Srinivasa Setty 1981
Issue: Whether capital gains can be computed when the cost of acquisition of an asset (self-generated goodwill) is nil/indeterminate.
Rule: S.48 mandates deduction of "cost of acquisition"; if cost cannot be determined, the computation machinery fails and no capital gains tax can be levied.
Held: Where the cost of acquisition of a capital asset is indeterminate (e.g., self-generated goodwill), the computation provision fails, and capital gains cannot be charged. The charging section and computation provisions form an integrated code.
CIT v. Balbir Singh Maini (2017) CIT v Balbir Singh Maini 2017
Issue: Whether a collaboration agreement (development agreement) where possession is handed to developer constitutes "transfer" under S.2(47).
Rule: S.2(47)(v) read with S.53A of Transfer of Property Act; "transfer" includes arrangements allowing possession under part performance.
Held: Unless conditions of S.53A of TPA are strictly satisfied (including willingness to perform one's part of the contract), mere handing over of possession under a development agreement does not constitute "transfer" for capital gains purposes.
Distinctions
| Feature | STCG | LTCG |
|---|---|---|
| Holding period | Within prescribed limit (12/24/36 months) | Beyond prescribed limit |
| Indexation | Not available | Available for assets acquired before 23 July 2024 (old regime) |
| Tax rate (listed equity) | 20% (S.111A) | 12.5% above Rs.1.25L (S.112A) |
| Tax rate (others) | Slab rates | 12.5% flat (S.112) |
| Set off | Against any capital gain (STCG or LTCG) | LTCL only against LTCG |
| Exemptions | Limited (S.54D) | S.54, 54B, 54EC, 54F available |
Flashcards
What is the charging section for capital gains?
Section 45(1) of the Income Tax Act.
What is excluded from the definition of "capital asset" under S.2(14)?
Stock-in-trade, personal effects (except jewellery/art), agricultural land in rural India, gold bonds under specified schemes.
What is the holding period for listed equity shares to become long-term?
More than 12 months.
What exemption is available under S.54EC?
LTCG invested in specified bonds (NHAI/REC) within 6 months, maximum Rs.50 lakh, lock-in 5 years.
What happens when cost of acquisition is indeterminate?
Per CIT v. BC Srinivasa Setty, the computation machinery fails and capital gains cannot be charged.
What is the LTCG tax rate on listed equity shares from AY 2025-26?
12.5% on gains exceeding Rs.1,25,000 per year (S.112A).
Exam Scenario
Mr. Verma purchased a residential house in April 2020 for Rs.40 lakh and sells it in July 2026 for Rs.1.2 crore. He invests Rs.50 lakh in NHAI bonds within 4 months of sale and purchases a new residential house for Rs.45 lakh within 2 years. Compute capital gains tax liability.
Approach: Holding period = 6+ years (> 24 months) → LTCG. Full consideration = Rs.1.2 crore. Cost of acquisition = Rs.40 lakh (indexation may apply for pre-23/7/2024 acquisition under old regime, or compute at 12.5% without indexation). Exemption u/s 54EC = Rs.50 lakh (NHAI bonds, within 6 months). Exemption u/s 54 = proportionate (Rs.45 lakh invested in new house). Apply S.54 first, then S.54EC on remaining LTCG. Net taxable LTCG = Total gain minus exemptions. Tax at applicable rate.